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Bundling as competitive strategy Jeff Mac. Kie-Mason SI 646

Do you want to see… Gone With the Wind?

…well, then you also gotta pay for… Getting Gertie’s Garter?

Loew’s “block booked” its movie backlist for licensing to TV. Why?

Suppose GWTW worth $10 K, GGG worth $0 K Can’t get any more from block-booking than from separate booking.

Content GWTW N e t wo r k -max separate prices? $10, 000 for GWTW $3, 000 for GGG Revenue = $26, 000 GGG ABC $12, 000 $3, 000 NBC $10, 000 $4, 000 Bundle price? $14, 000 Revenue = $28, 000

Consider selling two goods to many consumers with different valuations. Consumer choice if sold v 2 separately Buy only good 2 v 2 PB Buy both Consumer choice if bundled Buy both P 2 PB = v 1 + v 2 Buy neither Buy only good 1 Price 1 Buy neither value 1 P B v 1 So, best strategy depends on number of customers in each region.

When is bundling effective? v 2 Perfectly positively correlated valuations P 2 Don’t v 2 PB Buy PB Perfectly negatively correlated valuations P’ 2 buy P 1 PB No gains from bundling (P 1=P 2, PB= P 1+P 2) v 1 P’ 1 P B v 1 Complete surplus extraction from bundling

Bakos & Brynjolfsson on bundling information goods

Bundling paperback books pb pb p 1 = = ? , , bb = ? 13 = 3 ? , , 11 = ? 10 = 5 Sources: Image on left: CC BY-NC-SA Yochai Benkler (Wealth of Networks) http: //creativecommons. org/licenses/by-nc-sa/2. 5/ (Wealth Networks) Image on right: http: //www. gutenberg. org/etext/14304

Prop 2: If MC large enough, bundling will be unprofitable. Bundle will include some goods with v > MC, some goods with v < MC. If MC high enough, paying so much for unwanted goods that it outweighs benefit of demand averaging

Economies of scale in distribution favor bundling. The Internet reduces distribution economies, can induce unbundling.

Why consider only bundling monopolists? Info products usually face some competition. Fay & Mac. Kie-Mason: With some imperfect competition, most demand aggregation profit competed away. Consumers keep surplus.

PD: charge different prices Bundling is alternative to price discrimination when demand heterogeneous. Bundling: average across goods

“Even information commodities can be successfully differentiated if you exploit the unique features of the Internet. ” (S&V p. 26)